What next for Venezuela?

Later this month, Venezuela is holding Presidential elections once again.

Whatever the outcome of the vote, the next government will be facing significant challenges over the next few years, as the Venezuelan economy is almost entirely dependent on revenue generated from the oil and gas industry, Gibson Shipbrokers said in a report.

OPEC’s decision in November, 2014 to remove all production limits hit Venezuela particularly hard, as the oil price fell to historically low levels, resulting in the nation’s economy slumping from what was already a precarious position, despite the country sitting on the world’s largest proven oil reserves.

Venezuela has lacked the financial investment and expertise from overseas companies, which could have helped drive down production costs, as well as support higher production levels. In turn, this would have at least slowed the nation’s economic decline.

According to the IEA, Venezuelan production fell to just 1.5 mill barrels per day in March, down 24% from a year earlier. Production has fallen by around 40% since Maduro took office in 2013, following the death of Chavez.

Until recently, sanctions imposed by the US against Venezuela had benefited the tanker market in terms of long haul crude exports previously destined for US refineries. However, as production and the quality of the crude continued to decline, the impact on shipments is a cause for concern.

Between January and April this year, some 9.5 mill tonnes of crude and fuel oil was shipped on VLCCs and Suezmaxes to Asia, down from 12.2 mill tonnes during the same period of 2017.

Fortunately for the tanker market, increased volumes from the US and Brazil have more than compensated for this loss.

Venezuela’s oil and gas industry urgently needs huge investment from outside, which will probably need to be in the form of technological help and investment. However, the current political impasse with the US will make this difficult.

The fear of another Maduro victory, the most likely result, has resulted in several companies trimming their operations further in the country. For example, in April, Schlumberger joined other service providers, by reducing its Venezuelan workforce, because of payment problems to the company. Chevron has also withdrawn key personnel ahead of the election.

In the same month, ConocoPhillips received confirmation from an arbitration case that the state-owned oil company Petroleos de Venezuela (PDVSA) owed $2.04 bill in a contractual compensation settlement dating back to 2007. Also last month, Halliburton announced that it was writing down its remaining investment in the distressed OPEC member, citing ‘continued devaluation of the local currency, combined with US sanctions and ongoing political and economic challenges’.

Reuters reported that in March, PDVSA’s refineries were operating at 43% of their total capacity, due to a lack of spare parts, light crude and feedstock, caused by cash flow problems. Venezuela is consistently short of gasoline and other fuels and is forced to import more and more to supplement domestic demand.

The elections are unlikely to change the political scene, though the outcome will be keenly followed in Washington and further measures could be put in place against the country.

Therefore, it is difficult to see much hope of a turnaround anytime soon. The problems that plague Venezuela’s oil industry are only going to get worse, as the nation’s economic and political crisis deepens.

For example, the IEA has forecast that production will fall to around 1 mill barrels per day by 2020, which places an even greater burden on servicing its huge international debt.

The pressures on the Caracas government continue to mount and at the moment there appears to be no release valve, Gibson warned.

Meanwhile according to other reports, PDVSA has suspended oil storage and shipments from its Caribbean facilities, following a move by ConocoPhillips to temporarily seize the firm's assets on four islands, according to a PDVSA source and Reuters data.

PDVSA has begun concentrating most shipping in its main Jose crude terminal on the country's east coast and diverting its tankers back to Venezuelan waters to avoid seizure.

"We are no longer storing or shipping oil from the Caribbean islands. We are now mostly depending on Jose," a PDVSA source told Reuters.

Last year, PDVSA shipped over 400,000 barrels per day of crude and refined products from five owned and leased facilities on Aruba, Bonaire, Curacao and St Eustatius, according to internal company data. The terminals handled around 24% of its total exports.

A potential lack of crude at Curacao's 335,000 barrels per day Isla refinery, operated by PDVSA, could force the facility to halt operations, the island's Prime Minister, Eugene Rhuggenaath told Reuters, adding that it would import fuel if necessary, even though no assets have yet been seized on the island.

"We are aware of the potential risks for the operation of the refinery," he said. "A stoppage of the operation would have a devastating impact economically and socially."

PDVSA's US refining arm, Citgo Petroleum, also uses the Aruba terminal to discharge, store and blend Venezuelan and foreign crudes for its refineries along the US Gulf Coast.

ConocoPhillips has attached at least 4.8 mill barrels of PDVSA's stored crude and fuel oil at Bonaire and St Eustatius, according to shippers and the PDVSA source, a fraction of the terminals' total capacity of 53 mill barrels.

In Venezuela, cargoes arriving from the Caribbean have begun to create vessel bottlenecks around Jose and the jetties that serve PDVSA's biggest refinery, the Paraguana Refining Centre (CRP), according to Reuters’ data.

On Monday night, PDVSA ordered the Aframax ‘British Cygnet’, which was waiting to discharge at Curacao, to divert to Venezuelan waters, according to a shipper and Reuters data.

The vessel had loaded crude at Primorsk last month and arrived at Curacao's Bullen Bay terminal on Sunday, two days after at least two courts ordered the retention of PDVSA's inventories and facilities in the Caribbean at the request of ConocoPhillips.

‘British Cygnet’ follows at least nine vessels diverted since last Friday from Curacao and Bonaire to Venezuela and Cuba to avoid possible tanker arrests or their cargoes.